June 10th, 2014
Monetary Policy Week in Review – 02-06 June 2014
by Peter Nielsen, Central Bank News
More than five years after the U.S. Federal Reserve, the Bank of Japan (BOJ) and the Bank of England (BOE) slashed rates to technically zero, the European Central Bank (ECB) followed suit last week, cutting its benchmark refinancing rate to 0.15 percent.
The four major central banks in the world - the Fed, the ECB, the BOJ and the BOE - are now all in the unprecedented situation of employing ZIRP (Zero Interest Rate Policy), yet the global economy is neither in the depth of a financial crises, nor recession.
Although ECB President Mario Draghi didn't exclude another small cut in rates, he said that "for all practical purposes, I would consider having reached the lower bound today."
As the other three central banks, the ECB is flanking its zero rate policy with a series of extraordinary measures, once again pushing the boundaries of traditional monetary policy.
One of the hallmarks of the ECB's initiative was a 10 basis point cut in the deposit rate to minus 0.10 percent, an experiment only attempted by Sweden's Riksbank and Denmark's Nationalbanken.
The ECB also cut the rate on its marginal lending facility, used by banks to obtain funds on an overnight basis as a last resort, by 35 basis points to 0.40 percent.
In addition to the 10 basis point cut its refinancing rate - a move that is more symbolic that economically important - the ECB is also launching a 400 billion euro Targeted Longer-Term Refinancing Operations (TLTRO) program with the specific aim of getting the funds to Europe's households and non-financial businesses.
Unlike the BOE, which launched its Funding For Lending Scheme (FLS) in July 2012, a forerunner for TLTRO, the ECB's lending scheme specifically prohibits borrowers from using the 4-year, fixed rate, low-cost loans for home purchases.
At his press conference, Draghi explained that he wants to be sure that the low interest rates offered by the ECB under TLTRO actually make it into the economy and not just money markets. "We want to make sure that this feeds into the bank lending channel because our economy is 80 percent based on banks," said Draghi,
Other features of what Draghi described as "a significant package" was the suspension of sterilization of liquidity injected under the Securities Markets Program (SMP) and an extension of the ECB's regular refinancing operations as fixed rate tenders with full allotment at least until the end of December 2016.
The ECB purchased euro area government bonds under the SMP from May 2010 to February 2012 before terminating the program in September 2012.
It is the closest the ECB has come to asset purchases as carried out by the Fed and BOE. But up to now, the major difference between the ECB and the other major banks in their asset purchases was that the ECB has absorbed the liquidity it pumped into the system via weekly tenders.
The decision to suspend these tenders - valued between 150 and 170 billion euros - illustrates how the ECB is adapting its policy framework to current policy challenges.
As Draghi explained, the original decision to sterilize the bond purchases under SMP was due to the fear of boosting inflation, at that point over 2.0 percent.
"Now we are in a completely different world, so that now this decision actually takes place in the background characterized by low inflation, a weak recovery, weak monetary and credit dynamics," Draghi told last week's news conference.
The final, and potentially most far-reaching initiative, was the ECB's commitment to breathe life back into the market for asset-backed securities (ABS), a market that has shrunk by almost 80 percent since the global financial crises.
Together with the BOE, the ECB has been working to boost Europe's asset-backed bond market as it would provide a direct avenue for central banks to provide credit to non-financial private companies, bypassing Europe's debt-laden banks.
The ECB envisions securities that are simple in their structure, based on real loans to companies, not complex derivatives or debt obligations, and completely transparent. Through the first 24 weeks of this year, central banks have now cut their policy rates 25 times, or 11.7 percent of this year's 214 monetary policy decisions taken by the 90 central banks followed by Central Bank News.
This is up from 10.6 percent at the end of May, 9.6 percent at the end of April and largely the same at 11.9 percent at the end of March, a clear illustration of how the global trend has now changed in favor of lower rather than higher interest rates.
So far this year, policy rates have been raised 19 times, or 8.9 percent, down from 9.2 percent end-May and 10.8 percent end-April.
The shifting trend can be seen in both advanced and emerging market economies. Central banks in advanced economies have changed their rates a total of 4 times so far this year: 2 rate cuts and 2 rate raises.
Emerging market central banks have changed their rates a total of 20 times: 10 rate cuts and 10 rate rises.
Central banks in frontier markets are still largely easing their policy stance, with rates cut a total of 5 times and only raised once. Central banks in other markets are also leaning toward easier conditions, with 8 rate cuts so far compared with 6 rate increases. LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:
- Australia maintains rate, sees period of stable rates
- India maintains rate but low inflation to pave way for cut
- Poland maintains rate, to consider rate change in in July
- Canada holds rate, repeats change depends on new data
- Uganda cuts rate 50 bps, may need to ease further
- ECB cuts refi rate 10 bps, repo rate now at minus 0.10%
- BOE maintains rate, size of QE, as expected
- ECB can cut rates more or use unconventional measures
- Mexico cuts rate 50 bps, not considering further easing
TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
This week (Week 24) 10 central banks will decide on monetary policy, comprising the countries of Iceland, Croatia, New Zealand, Serbia, Indonesia, South Korea, Chile, Peru, Japan and Mozambique.
TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|